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Buachaill
Buachaill, Barrister
Category: Law
Satisfied Customers: 10190
Experience:  Barrister 17 years experience
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We are 2 Directors (of 3 Directors total) in a Ltd company

Customer Question

We are 2 Directors (of 3 Directors total) in a Ltd company running 3 years. We hold 10% shares each and a large company (a social enterprise healthcare company) that set us up, hold 80%. The premise of setting up was to execute their business plan to sell their in house developed healthcare software. The software has not been developed well and in a manner that could be sold and as such we find ourselves in a position where the CEO has asked us to dinner and said they wanted our company to close in 4 weeks.
It is an IT solutions company, there are 3 Techs and 2 Directors. We are in profit, but with a large set up loan against us from them.

We have no official written confirmation that the major shareholder wishes to end the business and there is obviously now a dispute over the fact that we could leave and take some of the basic service business.

What they have done, today, is say that if we don't wish to be Tupe'd into their business, with the 3 Technicians, then we need to resign. We have been sent forms asking us to sign and return to sign over our shares, asked for our bank fobs and codes, it's just a mess. None of this looks like it is being handled properly, and a senior person in their business has already accidentally told us this on a verbal phone call.

The share agreement and articles were drawn up by them in the first instance and would think that everything is laid down to protect them.

We feel very much like we were sold the idea of selling the software product, none of which has materialised and we have the business plans and projections. We brought a load of our existing customers in and we have the relationships with those people and skills to support them. We feel they believe they should keep these as a return on their investment, when in fact we have had no return on our personal investment, on a business plan that was essentially massively flawed.

We are quite unclear on how to best protect ourselves now or where we stand on exiting this gracefully.

Thanks
M
Submitted: 2 years ago.
Category: Law
Expert:  Buachaill replied 2 years ago.

Buachaill :

1. At the outset, when a business has to close or be re-structured, all parties loose in some manner. Here, what you have to do is to ensure that you reach what is your desired outcome via negotiations. The best outcome would appear to be if you bought out the business or put together a Management Buy Out that would enable you to keep the business you have a share in. Accordingly, I would advise you to speak to some financiers about obtaining the finance to buy out the business. As the business is profitable on an ongoing basis, if one ignores the large inter-company loan, it would be possible to either buy out or buy out part of the 80% of the business you don't own. At this stage it seems as if you have been put on the back foot by the CEO telling you they want to close the business. However, this is surely an opening gambit as the business is profitable. No one closes a business which can be sold or which makes money. You would be very foolhardy to just sign over your shares. Here you are better off negotiate to keep the business, licence any software rights and go your own way with your original customers.

Buachaill :

2. I get the impression from your question that you haven't really sat down and thought out a game plan as to how you are going to profit from this situation. To date, the larger company has set the agenda and is basically attempting to strongarm you out of what is a very valuable position. So you need to start making the proposals and see where that leads.

JACUSTOMER-s59uduqo- :

Good afternoon Sir,

Buachaill :

3. Hello!

JACUSTOMER-s59uduqo- :

So, we were aiming to use our professional and strong customer relationships to take the loyal customers to our original company, many of whom were customers in that coy. The new tack we have been thrown into this afternoon is that they wish to merge this company with the other and continue to service the contracts. We can be offered tupe as well as the others, not what we want. They are really trying to screw us now.

JACUSTOMER-s59uduqo- :

they obviously feel that they have invested 220K and want their pound of flesh return. however, our personal investment has been high, for little reward.

JACUSTOMER-s59uduqo- :

They are now talking about us resigning and walking away without the 3 months notice period, but therefore clearly under restrictive covenant

Buachaill :

4. Essentially, they are seeking to buy out your original company for nothing to gain full control over you and all your clients.

JACUSTOMER-s59uduqo- :

interestingly, we believe our employment contracts are 'missing in action', when an outgoing FD of theirs left under a cloud! I don't think they have our contracts, as they were related to our employment in this coy not theirs and we had them, up to a point that one of their previous FD's took a load of paperwork and registered the coy address back at their HQ instead of our business address here. Its all very sinister.

Buachaill :

5. Don't believe everything you hear! It sounds as if this larger company wishes your employment contracts disappeared.

JACUSTOMER-s59uduqo- :

yes, they are holding the cards as they see it. The 3rd Director in this coy is also a Director of one of their other Coy's and is a commercial coy (running at a loss !), though our coy is the technical specialist part of that.

Buachaill :

6. ULtimately, you need a bigger share of the business. When you have less than 25% you can always be diluted out. So you need to get above this threshold.

JACUSTOMER-s59uduqo- :

if our employment contracts were not in existence, would that perhaps not be better for us at this time, as there is no reference.

Buachaill :

7. It basically means your rights are not written down.

JACUSTOMER-s59uduqo- :

We are a couple of decent hard working technical guys, roped in somewhat to this and now trying to dig out. The business plan was proven to be fabrication within 12 months. We had brought in the tech staff to support their model and we worked all hours to get to even keel and then some profit. I even wrote to the CEO personally about 12months ago saying we should end it all as we couldn't see the end of the tunnel, that was rebuked and we carried on , worried mostly for our loyal staff, who we headhunted from previous places we had worked, so we feel very responsible for them and their families.

Buachaill :

8. That is all very well. But it is all in the past. Now you need to decide where you want to go and take this company now, or at least your interest in it.

JACUSTOMER-s59uduqo- :

what they are trying to do now is prevent us from taking service business which they are incapable of supporting and in essence our customers deal with us in a personal relationship way. They would choose us, we're confident of that. If they do not cease the coy trading (as they said was happening) and continue to run the coy instead, then that nails us under covenant

JACUSTOMER-s59uduqo- :

its very deliberate, they feel there is some mileage in the revenue, though small, from the business. they are a social enterprise healthcare coy and its not in their capability (though they have an inhouse IT team), yet they seem to want to pursue that.

Buachaill :

9. You can either negotiate a release of the restrictive covenant or force the company to get rid of you. Don't see this as an insuperable difficulty.

Buachaill :

10. This is a legal Question & Answer session. What is your legal question???

JACUSTOMER-s59uduqo- :

How should an 80% shareholder communicate to 2 Directors of our coy their intentions to cease or merge the coy, over dinner with the CEO of the major shareholder (as he did) or by what official means?

JACUSTOMER-s59uduqo- :

legally, we don't wish to roll over. we want the business we built, because we had to as theior promises of software sales were not fulfilled.most of

Buachaill :

11. There is no legal requirement or law which lays down how any intention should be communicated by a majority shareholder to a smaller shareholder. The law does not interfere in that area.

JACUSTOMER-s59uduqo- :

however, they are a multi million pound concern and we are small fry and don't wish to enter a legal wrangle we will never win anything from. can they hold us to any form of restrictive covenant if they don't have our actual employment contracts ie they merge the coy to enforce covenants that they have no proof of now it seems.

JACUSTOMER-s59uduqo- :

in fact they could merge the company and we could resign as directors, go off and continue our business relationships with our customers (most of which we brought in from our previous coy, still running!) and we could keep our shares and see a return on them when they indeed sell something?

Buachaill :

12. NO, unless they have a copy of the restrictive covenant they wish to enforce, they cannot enforce it.

Buachaill :

13. This is a matter for negotiation. The law has no role here when parties negotiate. I would suggest you discuss these issues with a business or management consultant, as these are not legal issues.

Buachaill :

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